Scarcity Pricing and Price Gouging

In the wake of Hurricane Harvey, and ahead of the likely devastation of Hurricane Irma, social media is awash in expressions of outrage over what is commonly labeled as “price gouging.” For the few unaware of the term, price gouging is a (derogatory) term for sharply increasing the price of a consumer good, e.g. bottled water or gasoline, either ahead of or after an event that spikes demand and disrupts supply chains. People routinely interpret a merchant’s major price increases in such times as profiteering off the misery and need of others.

Emotionally, this reaction is expected. Humans are social creatures by nature, and every calamity in history provides innumerable tales of people helping each other, often at personal risk or privation. To think that someone would callously seize an opportunity to extort from those in need is an affront to morality.

Emotional reactions are not, however, always correct reactions. In the case of price gouging, it behooves us to hold our emotions in check and consider the positives and benefits of price gouging, or, less pejoratively-put, scarcity pricing.

Consider, first, what the price of a consumer good or service actually is. It is a signal, a measure of the supply-demand dynamic. When there’s more supply of something and demand stays the same, prices fall. When there’s more demand for something and supply stays the same, prices rise. When demand drops and supply increases, prices plummet. When supply drops and demand increases, prices skyrocket. And, yes, that even applies to goods that are vital in times of emergency, like gasoline, food and water.

Consider, second, what would happen if some outside force (i.e. government) decided that, for the greater good, it would intervene in the free movement of prices as a signal of supply and demand. Consider what the effect of anti-gouging laws (which many demand out of misplaced indignation) would be in times of a crisis. If you were in a crisis zone, and found someone willing to sell you gas or bottled water at a cheap price, would you buy what you needed or as much as you could afford? Would you hoard in excess of what was sufficient to get you through the emergency (even with uncertainty factored in)? If you wouldn’t, rest assured that someone else would. And, rest assured that someone else would buy as much as possible with the intent of re-selling it at higher prices, even at risk of violating anti-gouging laws. Whereas a business owner is easily prosecuted for gouging against the law, someone peddling bottled water on the street isn’t going to be a high priority target.

Thus, if price gouging is banned, some get, by dint of luck, location, or coincidence, that which they need and then some, some can’t get what they need, no matter what they’re willing to pay, and some get what they need by paying gouge-level prices on the black market.

Don’t believe me? Remove the crisis, and remove the term “price gouging,” and you’re left with a system where government sets prices or price caps. Wanna know where thats been tried, and tried extensively? Places like Soviet Russia. What was the result? Scarcity, long lines, empty shelves and a robust black market. And a few who have plenty. There’s nothing wrong with having plenty if you acquired your plenty under the same circumstances as everyone else. But, if you took advantage of force, e.g. anti-gouging laws, your plenty deprived others of the opportunity to get what they need.

The laws of economics are often not given the same weight and respect as physical laws like gravity or entropy, but, given that they are rooted in human nature, are for all practical purposes as inviolate. They can’t be made to go away, even by all-powerful government, in times of crisis.

So, before you denounce scarcity pricing as wrong or evil or immoral, take the time to recognize that it serves a good purpose, and realize that, maybe, just maybe, that high price that deters you from “loading up” (i.e. buying far more than you really need) on something means there’ll be some left for others to buy later on.

I am twice-retired, a former rocket engineer and a former small business owner. At the very least, it makes for interesting party conversation. I'm also a life-long libertarian, I engage in an expanse of entertainments, and I squabble for sport.

Nowadays, I spend a good bit of my time arguing politics and editing this website.

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Why isn’t it considered price gouging for the price of art to go up when an artist dies.

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Scarcity pricing also works to discourage hoarding (“loading up” as you put it), which is better than having the gubmint policing the issue with “anti-hoarding” laws. Then the fat would *really* be in the fire!

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5 months 6 days ago

This Week's Poll

Are the November 2017 election results a referendum on Trump?

Yes, they reflect a deep unpopularity that will carry the Democrats to major gains in 2018.

Yes, but they don't predict 2018.

Somewhat, but local conditions were more of a factor.

Not really. The wins were in Democratic strongholds, and don't reflect the broader national mood.